The strategy trades suppliers of customers with extreme stock price moves, going long on jump-linked and short on crash-linked suppliers, using value-weighted portfolios with 20-day holding periods and daily rebalancing.
ASSET CLASS: stocks | REGION: Global | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Supply Chain
I. STRATEGY IN A NUTSHELL
Targets suppliers of 2,686 suppliers and 1,071 customers (excluding financials). Detects customer jumps and crashes via 52-week rolling regressions (±3.2 SD). Go long on suppliers of jumping customers, short on suppliers of crashing customers. Value-weighted, 20-day holding, daily rebalanced.
II. ECONOMIC RATIONALE
Customer crashes propagate to economically dependent suppliers via delayed supply-chain contagion. Effect amplified by low analyst coverage, high forecast dispersion, low institutional ownership, and smaller supplier size, highlighting information opacity and delayed price adjustment.
III. SOURCE PAPER
Contagious Stock Price Crashes [Click to Open PDF]
Buhui Qiu, Fangming Xu, Andy C. L. Yeung, and Cheng (Colin) Zeng — The University of Sydney – Discipline of Finance; Financial Research Network (FIRN); University of Bristol; Hong Kong Polytechnic University – Department of Logistics and Maritime Studies; Hong Kong Polytechnic University
<Abstract>
This paper examines the contagion effects of stock price crashes along the supply chain. We find that stock price crashes can be transmitted from major customers to suppliers with a delay of up to two weeks. Moreover, this delay is moderated by the information transparency of the affected suppliers, but there is only limited evidence on the impact of investor inattention. A long-short trading strategy based on the delayed crash transmission generates significantly positive abnormal returns of 40% per year. In addition, major customers’ stock price crashes can significantly predict supplier firms being delisted from stock markets in the near future. The results are robust to a battery of sensitivity tests. Overall, our findings shed new light on the capital market consequences of stock price crashes.
IV. BACKTEST PERFORMANCE
| Annualised Return | 34.84% |
| Volatility | 58.68% |
| Beta | N/A |
| Sharpe Ratio | 0.53 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
